Emma Simon: Getting clients engaged in ethical questions

What are the main questions you ask any prospective investor? I am assuming that age, current financial position and attitude to risk will be key – but how many advisers ask about their ethical outlook?

At the moment you are unlikely to be in breach of any FCA-mandated regulation for failing to identify whether investors want their retirement fund invested with arms manufacturers, tobacco companies or even, God forbid, payday lenders.

Recent events have highlighted how complex this whole area has become. Even the terminology is less clear. Once there were simply ethical funds, whose remits were largely dictated by the religious conviction that you shouldn’t profit from the wages of sin, be it gambling, alcohol or sex – at least video and magazine depictions of it.

Today, the term ethical investing has largely been dropped – probably because it sounds rather preachy. Instead we have socially responsible investment which targets companies with good environmental and social governance.

With the internet is awash with pornography, and the middle-classes getting sozzled on Sainsbury’s sauvignon blanc five nights a week, it’s not surprising that your average investor isn’t too bothered with these traditional ethical funds.

But we have replaced one set of anxieties with another. I’m sure I’m not alone in feeling a pang of guilt when I’ve driven to the supermarket rather than walked, then discovered I’ve left the hessian bag for life at home, again.

You might not want a wind turbine right next to your garden, but many of us are now far more environmentally aware. And more people want their investments to reflect these concerns but they also need a decent return on their money.

To date this hasn’t always been possible, but many of these newer SRI-mandated funds have better track records. Seven out of eight Alliance Trust funds, for example, have outperformed their peers and most now rightly benchmark themselves against mainstream indices.

That means many of these “green” funds still invest in large oil companies. But there is increased focus on putting money with companies that are less wasteful with our natural resources as well as supporting those that are developing more sustainable ways to generate electricity – be it biomass fuels, hydro-power plants or offshore wind farms.

Many SRI managers will argue that this doesn’t just make environmental sense, it’s good business sense too. Legislation is likely to penalise companies that are big polluters or have supply chains that exploit overseas workers, for example.

Companies that are more energy efficient are likely to have a tighter control on costs, potentially making them more profitable.

There will be many companies that lose money in the nascent renewable energy market, no doubt exploiting whatever tax-breaks and subsidies are offered on the way. But there could be a real investment opportunity for those that get it right. After all, energy demand is only going one way and even with all that shale gas under Blackpool, it looks likely there’s only so much we can burn before we fry the planet.

This isn’t going to happen in the near future and probably not before our pension pots are long since spent and we’re fossilising ourselves. So why should advisers bother with such issues? Many of their clients may think this global warming is a load of cobblers anyway.

However, if you can get clients engaged and interested in where their money is invested, whether its solar power or Paddy Power, it’s my hunch that they’ll stay customers for longer. I’m also pretty sure that it will only be a matter of time before this type of questioning is required anyway.

The big hurdle to overcome with financial advisers is limiting dramaticlly the number of funds to recommend, when introducing the “ethical question”. The truth is that unlike twenty years ago when I first started to commit to the ethical investment sector, there are over 130 funds within the ethical and SR universe. It is much easier to put together a meaningful and balanced investment portfolio. Past performance is pretty good too (if you choose the right funds) and as you say ethical investment clients are very loyal – even if markets are tough for a long period of time.

I would encourage every financial adviser to ask the ethical question, but even if you shy away there is a good argument for having 10% of a clients investment portfolio in SRI Funds. The future growth prospects for SRI are looking good.